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Feature: Nigerian crude oil emerges from South Africa storage amid flattening structure

Highlights

Nigerian crude from South Africa's Saldanha Bay storage site has come into the market, adding to the glut of Nigerian crude available in the April program, according to trading sources.

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"Everyone is trying to empty storage with the structure where it is and diffs coming off; everyone is trying to do it and you are seeing offers out of Saldanha, but everyone is in same boat," said one West African crude trader.


QUA, ESCRAVOS OFFERED OUT OF STORAGE


Nigerian crudes Qua Iboe and Escravos have been offered out of storage, by trading house Vitol and oil major Total.

Market sources estimated that around 10 million-11 million barrels of stored oil has been offered out.



Additionally, around 15 million barrels of the April program were still available, with the May programs expected to be released later this week.

As a result, trading sources said that due to the overhang, crude differentials started to see pressure, particularly Qua Iboe and Escravos, with the former seeing its offer levels fall 40 cents/b over the course of the past two weeks, reflecting a tougher market for sellers.

"Values remain stable but pressured," a second crude trader said.

Vitol was heard to have fixed the VLCC Astro Chloe to take a 270,000 mt crude cargo from storage in Saldanha Bay in South Africa to Singapore with March 28-31 loading dates at w58.

"Vitol may be looking to lift another VLCC with April dates as well because the storage economics are not making sense down there at the moment," a shipbroker said.

Rumblings of South Africa storage being emptied have been seen in the market for a few weeks, although these are the first signs of volumes actually leaving Saldanha Bay.

At the end of February, Vitol was seen offering up to 4 million barrels of Qua Iboe crude, basis DES Rotterdam/Lavera, arrival April 20-30, in the Platts Market on Close process.

At the time, several trading sources said the oil being offered by Vitol was volumes being stored in South Africa.

While there has not yet been a ship fixed by Total, last week the company for two consecutive days -- on March 15-16 -- offered a VLCC comprised of 2 million barrels of Escravos crude, which was confirmed as coming out of Saldanha Bay.

The Total indication was basis CFR Singapore, arriving May 15-25.

A shipping report on Monday also reported that Total was seeking a VLCC for a Saldanha Bay April 20-22 load, with East discharge options, although an update on Tuesday showed that the fixture was on hold at the moment.


STORAGE REDUCTION INCENTIVE


There has been a growing incentive for traders to move crude oil out of storage in recent weeks, with a noticeable flattening emerging in the structure of the BFOE Contracts for Difference curve (CFD).

S&P Global Platts Monday assessed the contango of the eight-week CFD curve at 46 cents/b, down from 75 cents/b a week earlier.

Indeed, certain parts of the curve have been particularly strong, with backwardation emerging between April 3-7 and April 10-14.

According to market participants, the strength at this point in the curve is attributable to traders hedging on VLCCs that may have been fixed to move Forties crude to the Far East in the third decade of April.

"That period [of backwardation] is the period in which people are hedged for a physical move on VLCCs. They have bought three-week rolls and hedged," a North Sea trader said.

"Dated/Dubai is very narrow and VLCC freight is very cheap," a second North Sea trader said. "The market probably expects barrels to move to the East."

The flatter structure of the curve means there is less incentive for traders to keep physical oil in storage. "It has been a big theme this year. Anytime we come close to backwardation people begin to unwind their hedges and move oil out of storage," the first trader said.


SALDANHA BAY'S IMPORTANCE TO WAF STORAGE


Saldanha Bay is a particularly popular destination for traders looking to store crude oil.

Given its location between the demand centers of Asia and Europe, barrels can be sent either east or west depending on the prevailing economics of the Brent/Dubai EFS spread.

"You can go into any direction -- you have all optionality, and that makes [Saldanha Bay] interesting," a third trader said.

However, most grades coming out recently would likely be headed to Asia due to the stronger demand seen in that region and the narrower EFS, traders said.

Crude from as far as the North Sea, the Mediterranean and Latin America has been placed into storage in this location in recent years. The majority of crude stored there is Nigerian, according to trading sources.

Saldanha Bay's storage capacity is around 40 million-50 million barrels of oil, and it emerged as a very popular spot for storing crude oil from July 2014 when the crude oil market flipped into a contango structure.

--Gillian Carr, gillian.carr@spglobal.com
--Peter Farrell, peter.farrell@spglobal.com
--John Morley, john.morley@spglobal.com
--Edited by Jonathan Fox, jonathan.fox@spglobal.com